Last Updated on Dec 24, 2019 by James W
There are several ways that a traders can evaluate a market and determine the future direction of the price. One of the most common types of analysis is fundamental analysis. This refers to the economic policy or monetary policy that will affect the price. Fundamental analysis also refers to using earnings and revenues to determine the value of a stock. By performing fundamental analysis you have a basis for why the price of an asset will rise, fall or remain unchanged.
What is Fundamental Analysis?
Fundamental analysis is the study of new information. Each type of asset class as different types of information that would be categories as fundamental information. For example, the drives for the forex market is monetary policy that is driven by economic and political information. As traders evaluate the economic backdrop of a country they can determine if the information will increase or decrease the sovereign yields of a country.
When you are evaluating the fundamental information of a commodity such as oil, you might be more interested in supply and demand constraints. Inventory levels, production and stockpiles help drive the outlook of the oil market. These catalysts will help you learn trading online.
The stock market has several fundamental drives that can be the impetus for future price movements. For example, financial results such as earnings per share or revenues will help a trader make a determination of the price. Traders use growth metrics to evaluate the price multiple of a stock based on net profits.
What Features of Fundamental Analysis are Important
The key in evaluating fundamental analysis is to understand that all the available information is priced into a security. This means that when new information becomes available, the price of a stock should immediately reflect the new information. For example, if the Fed fund futures market has priced in that the Federal Reserve will reduce interest rates by 25-basis points, but the Fed instead at its monetary policy meeting cuts by 50-basis points, the new information will immediately be priced into all the assets that are affected by this move. Since only 25-basis points were priced in, currency pairs that have the dollar as a currency could fluctuate wildly.
The most important aspect of fundamental analysis is whether the market has already priced in the new information. When markets are caught off sides there can be sharp movements when the new information becomes available.
Is Political Information Considered Fundamental Analysis
Most investors consider political information as fundamental analysis that can move a market. Political unrest could also be considered sentiment information. Politics plays an important role in driving fundamental analysis.
Fundamental analysis is the evaluation of information that can drive the price of a security or asset. Economic data along with monetary policy information in addition to earnings and supply and demand are key elements of fundamental analysis. The key when evaluating fundamental analysis is determining whether the new information you are evaluating is already priced into an asset or security.